What to Do with Your Retirement Plan When You Start a New Job

One benefit many companies offer is a retirement savings plan, such as a 401(k). Having a retirement savings vehicle can help you better prepare for retirement if used correctly. But what happens when you decide to leave your job or leave the workforce completely to pursue another opportunity? What happens to your retirement plan and what are your options?

According to the Center for Retirement Research at Boston College, 1.5% of assets leak out of retirement accounts each year. Leakage reduces retirement wealth by 25%. One of the leading causes of retirement leakage is cashing out or taking out withdrawals from 401(k) accounts. But before you decide to cash out your 401(k) when moving to a new job, know you have other options.

Here are a few different options you have for your old 401(k) when you start a new job:

Keep the 401(k) with Your Current Plan

You can simply keep your 401(k) plan with your current employer. However, some employers may require a certain balance minimum to maintain the account. So, be sure to check with your Human Resources department or plan administrator to understand the requirements before keeping your money with your previous company.

Crystal Rau, CFP®, Founder at Beyond Balanced Financial Planning, says, “All plans are different, but this can be a viable option if your old 401(k) has inexpensive investment options. But be wary, as you may not have all the available features as you did previously as an employee of the company that offers the plan.”

Another risk you run is your previous company being acquired by a different company. This will make it a little more challenging to access your account or move your money in the future. There is also a chance that you may forget about this account, essentially leaving money on the table. Every little bit you save for retirement is important. You may not want to take the chance of forgetting about your old 401(k) account.

Roll Over Your 401(k) to Your New Plan

When you start your new position, review your retirement plan options. If you are pleased with the investment options and the fees aren’t too high, you may consider rolling your old 401(k) into your new 401(k). Consolidating accounts may make it easier to manage and keep track of your progress.

If you have an after-tax 401(k), known as a Roth 401(k), make sure your new company offers this feature. You can only roll over Roth contributions to a new Roth 401(k).

Roll Over Your 401(k) to Your IRA

When you started your previous job, your employer may have given you the option to select a pre-tax or after-tax 401(k). This means that you could contribute to your account with either pre-tax contributions or after-tax contributions. If you contributed to your 401(k) with pre-tax dollars, you would later have to pay income taxes on your withdrawals after age 59 and a half. If you withdrawal your money prior to reaching 59 and a half, you would have to also pay a 10% penalty. For an example, if you had a pre-tax account worth $100,000 and you were at a 25% tax bracket in retirement, you would really only have $75,000. If you had an after-tax account commonly known as a Roth 401(k), you would have $100,000 in the account.

Depending on the retirement account you currently have, you may also consider rolling your previous 401(k) into an IRA (pre-tax) or Roth IRA (after-tax) account. IRA accounts often have more flexible investment options and lower fees. You may have more control over your retirement savings by managing an IRA or Roth IRA. You can also select the financial planner that you want to work with. When you have a 401(k), your employer selects the financial advisor and investment options for your plan, limiting your flexibility.

Rau states, “There is a reason why rolling over a 401(k) is a common choice, for one, when you roll it over you have more investment options versus limiting yourself to your plan options. Another reason, the investment options within your old plan may be proprietary funds that carry hefty fees. All funds carry internal expenses and it is sometimes hard to determine what expenses you are paying.”

A 401(k) plan may be one of the most common retirement plan offered by employers, but some employers offer plans such as 403(b)s, 457s, Simple IRAs, SEP IRAs, and Defined Benefit Pension Plans. Each plan may have its own set of rules and regulations for rolling over to a new account, so speak with a financial planner and tax advisors before moving your account.

Cash Out Your 401(k)

Lastly, you could cash out your 401(k). As previously stated, this should be your last resort. Not only can cashing out your 401(k) impact your financial future, but it can cost you. If you are under the age of 59 and a half, you will have to pay a 10% penalty on any money you withdrawal from your 401(k) as well as income taxes. This could significantly lessen the amount of money you end up with.

Other Things to Keep in Mind Before Moving Your 401(k)

Before moving forward, you want to make sure you understand all implications of any decisions you make.

Speak with your plan administrator. First, speak with your plan administrator or Human Resources department to understand what’s required for moving your 401(k). This will make the process a lot easier when it comes time to fill out paperwork and move your money.

There may be a fee for rolling your plan over. Some 401(k) plans charge a fee for rolling over your account. Even if there is a small fee, it may still be worth it to get your account into a more appropriate retirement saving vehicle.

You can roll over as much as you would like, there are no limits. Keep in mind that you don’t have to roll over your entire account.

The IRS gives you 60 days to roll over your 401(k). Once you request a rollover, the money has 60 days to be deposited into your new account. If you have received the check, make sure to deposit it in a timely manner so you won’t be penalized for taking a distribution from your account.

When you transition to a new job, remember you have options for your employer-sponsored retirement plan. Take time to weigh out the pros and cons of each decision before proceeding.

Rau concludes, “Whatever you choose to do, it makes sense to consult with an investment advisor who can really dig into the plan details to give you the best option. Everyone has different goals and it depends on what you want to accomplish.”

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